What conditions might argue for allowing a temporarily out of stock policy?
Extremely high storage costs would act as a disincentive for storing the stock at high enough levels to prevent stock-outs.
What effect does this policy have on storage costs?
It reduces storage costs, especially if there is a high level of variability in demand that would necissitate potentially storing a lot more stock than you would actually sell in short time intervals.
Should costs be assigned to stock-outs? Why?
Stock-outs will result fewer orders being filled, since customers may seek out a competitor or subsiute instead of waiting for the restock.
How would you make such an assignment?
There would need to be a loss-factor I would call ‘missed sales = m’. The loss-factor m would be a cost like s and d.
What assumptions are implied by the model in Fig. 13.7?
Stock-outs will be remedied at a certain level and be built back up
Suppose a “loss of goodwill cost” of w dollars per day is assigned to each stock-out. Compute the optimal order quantity Q and interpret your model.
The optimal quantity is when the cost from stock-outs is less than the storage costs of keeping enough stock to prevent stockouts. The delivery cost is constant in either scenario. Therefore the model is:
\[minimize c = \frac{d}{t} + \frac{srtm}{2}\] subject to: \[m<s\]